If other European countries have recently managed big reforms, why can’t France?

THIS SPECIAL REPORT has argued that the economic problems facing France are grave and immediate and that the need for reform is pressing. None of this was much talked about in the presidential and parliamentary election campaigns earlier this year. Yet the new government of François Hollande has belatedly come to recognise some of the dangers.

Some seasoned politicians seem to believe that reforming France is impossible. That is too pessimistic. Many other European countries that for years resisted change have now pushed through substantial, politically controversial and often painful reforms. But almost all have four things in common that are currently lacking in France: a deep and widespread sense of crisis; a population that accepts there is no alternative to change; a political class with the fortitude (and often also an electoral mandate) to push it through; and leaders who really believe in what they are doing rather than feel it is being forced on them from outside.

Examples abound. In the 1980s the British, Dutch and Irish went through painful adjustments. Over the past decade the three Baltic countries, especially Latvia, have undergone what economists call an “internal devaluation” in which wages and GDP per head have shrunk by a quarter or more in order to regain lost competitiveness. Since the euro crisis began in earnest in late 2009, Greece, Ireland and Portugal have imposed swingeing budget and wage cuts and other unpopular reforms on their voters. Spain and Italy are having to do the same.

The northern route

The two best models for France are Germany and Sweden. Germany, inside the euro, became so alarmed by slow growth, lack of competitiveness and high unemployment in the euro’s early years that the Social Democratic chancellor at the time, Gerhard Schröder, brought in a series of reforms to improve labour-market flexibility and make welfare payments somewhat less lavish. This was the basis for today’s super-competitive economy. An even better example is Sweden, outside the euro, which began its reforms after a banking crisis in the early 1990s. Under a centre-right government since 2006 it has stuck firmly to continuing fiscal retrenchment and reform of labour markets and the welfare state. Sweden is now growing and creating jobs, and has even administered a fiscal stimulus.

These examples show what can be done, but they also demonstrate that reform is difficult and painful. The first Socialist president to be elected in France in almost a quarter of a century will find it especially hard. Mr Hollande knows what happened to Mr Schröder: the voters kicked him out in 2005. And he is familiar with the aphorism cited by Jean-Claude Juncker, the prime minister of Luxembourg and president of the euro group of finance ministers, that “we all know what needs to be done, we just don’t know how to be re-elected after we’ve done it.”

The French people may be waking up to their troubles, but there is nothing like the sense of crisis felt in the Baltic countries, in Athens, Dublin and Lisbon, and now in Madrid and Rome. Moreover, neither Mr Hollande nor Mr Ayrault seems to be the sort of leader who will be resolute in a confrontation. If and when things go wrong Mr Hollande might be forced, like so many of his predecessors, to find a new, tougher prime minister, perhaps Manuel Valls, the interior minister, or Michel Sapin, the labour minister. But that would happen only if the pressure for change were to become far more intense.

Things in France may thus need to get a lot worse before they get better. The reforms and austerity being pursued by other euro-zone countries are reducing their cost base and shrinking their current-account deficits, leaving France much more exposed. Differences between France and Germany over deeper political and economic integration are adding new tensions.

It is widely believed that Spain and Italy are the key tests for whether the euro will survive, but in some ways France may be more crucial still. If it does not improve its competitiveness and also obstructs deeper integration, it is hard to see it staying in the euro—and it is almost impossible to envisage a single currency without it. Precisely when all this comes to a head may depend on events in the run-up to the German election next September, on whether new turbulence hits the euro—and, above all, on how long financial markets continue to treat a largely unreformed France as a safe haven for their money.

A crisis is surely coming. Yet when it arrives, reforms in France may not have to be quite as savage or as impossible to push through as many believe. France has some big advantages, and the French are capable of accepting change. Not long ago it was thought they would never accept a smoking ban in indoor public spaces, or observe speed limits. Now they meekly do both. Many of them rail against globalisation, yet they eagerly embrace its fruits. They may believe that free-market capitalism is bad, but they are surprisingly adept at practising it.

A bold and determined reformer could restore French competitiveness, boost growth and reduce unemployment, restoring some of the former glory. The trouble is that, on the evidence so far, it is hard to see the normal, easygoing Mr Hollande as the man to do it.